The European Union is looking at ways to get the economy back on its feet next year after what is expected to be the 27-nation bloc’s deepest ever recession, caused by the coronavirus pandemic.
EU leaders will hold talks on April 23 and provide some guidance. But the issue is highly divisive because it concerns European solidarity in a crisis governments’ willingness to share costs and ensure all member countries have an equal chance to recover.
The International Monetary Fund expects the output of the 19 countries that share the euro to contract by 7.5% this year rather than grow 1.2% as expected only in February, before the pandemic triggered national lockdowns in most EU countries.
With such output loss, European politicians compare the task of bringing the economy back on track to the U.S. Marshall Plan for Europe after World War II.
CORONABONDS OR EUROBONDS
France has proposed a Recovery Fund that would be financed through joint debt issuance. The fund could be around 3% of EU gross domestic product, or some 420 billion euros. After borrowing on the market, it would lend on to governments so that all member countries can benefit from a low and equal borrowing cost for the recovery.
Paris did not give any technical details of how such a fund would be set up, what its capital would be or whether the liability of its members would joint and several or not. Some officials have pointed out that setting up such an institution, getting a credit rating and marketing its bonds would take more time than the EU has to start supporting a recovery.
The main obstacle, however, is political. Even though the fund’s borrowing would be limited in scope and only for the particular purpose of getting Europe’s economy going again, it would not fly in Germany, the Netherlands, Finland or Austria, for whom joint debt is legally or politically unacceptable.
JOINT BORROWING USING THE EU’S LONG-TERM BUDGET
A more realistic option, proposed by EU Budget Commissioner Johannes Hahn, is that borrowing for the recovery be done by the executive European Commission which has a triple-A credit rating against the security of the next EU long-term budget.
The Commission could borrow around 100 billion euros a year on the market for three to four years after the epidemic, during which the recovery would take place.
Each year it would leverage that sum 10 times to 1 trillion euros a year by using the same method as in the EU’s flagship investment plan over the last five years: buying the riskiest tranches of an investment to attract private capital.
The scheme, which would provide around 4 trillion euros for the recovery over four years, would depend on EU governments providing implicit guarantees.
This could be done by temporarily for three to four years raising the maximum limit of 1.23% of EU gross national income set for the EU budget’s “own resources”, to 2%. GNI is the EU’s preferred measure of economic output.
It would not mean governments have to pay more to the EU, only that they would be ready to do so, if the loan from the Commission to a government was not repaid in time.
EU leaders will discuss this option, although they are unlikely to make a decision on it on April 23.
REDISTRIBUTION OF MONEY VIA THE EU LONG-TERM BUDGET
The EU budget, now under tough negotiation, is likely to be between 180 billion and 240 billion euros a year. Almost one-third of it goes to support farmers and yet agriculture produces only around 1% of EU GDP. Another third goes towards equalising standards of living in countries of the 27-nation bloc.
The next 2021-2027 budget could redirect funds from the less productive areas to focus them more on industrial, digital and green policy to help the EU economy modernise after the slump.